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NRZ > SEC Filings for NRZ > Form 10-Q on 15-May-2014All Recent SEC Filings

Show all filings for NEW RESIDENTIAL INVESTMENT CORP.

Form 10-Q for NEW RESIDENTIAL INVESTMENT CORP.


15-May-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of operations is intended to help the reader understand the results of operations and financial condition of New Residential. The following should be read in conjunction with the unaudited consolidated financial statements and notes thereto included herein, and with Part II, Item 1A, "Risk Factors."

GENERAL

New Residential is a publicly traded REIT (NYSE: NRZ) primarily focused on investing in residential mortgage related assets. We became an independent public company following our spin-off from Newcastle on May 15, 2013. We are externally managed by an affiliate of Fortress. Our goal is to drive strong risk-adjusted returns primarily through investments in servicing related assets, residential securities and loans and other investments including, but not limited to, Excess MSRs, servicer advances, real estate securities and real estate loans. Our investment guidelines are purposefully broad to enable us to make investments in a wide array of assets in diverse markets, including non-real estate related assets such as consumer loans. We generally target assets that generate significant current cash flows and/or have the potential for meaningful capital appreciation. We aim to generate attractive returns for our stockholders without the excessive use of financial leverage.

Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments. Our asset allocation and target assets may change over time, depending on our Manager's investment decisions in light of prevailing market conditions. The assets in our portfolio are described in more detail below under "-Our Portfolio."

Market CONsiderations

Various market factors, which are outside of our control, affect our results of operations and financial condition. One such factor is developments in the U.S. residential housing market, which we believe are generating significant investment opportunities. Since the 2008 financial crisis, the residential mortgage industry has been undergoing major structural changes that are transforming the way mortgages are originated, owned and serviced. Historically, the majority of the approximately $10 trillion mortgage market has been serviced by large banks, which generally focus on conventional mortgages with low delinquency rates. This has allowed for low-cost routine payment processing and required minimal borrower interaction. Following the credit crisis, the need for "high-touch" specialty servicers, such as Nationstar, increased as loan performance declined, delinquencies rose and servicing complexities broadened. Specialty servicers have proven more willing and better equipped to perform the operationally intensive activities (e.g., collections, foreclosure avoidance and loan workouts) required to service credit-sensitive loans.

Since 2010, banks have sold or committed to sell MSRs totaling more than $1 trillion. An MSR provides a mortgage servicer with the right to service a pool of mortgages in exchange for a portion of the interest payments made on the underlying mortgages. This amount typically ranges from 25 to 50 bps multiplied by the UPB of the mortgages. Approximately 77% of MSRs were owned by banks as of the fourth quarter of 2013, according to Inside Mortgage Finance. We expect this number to decline as banks face pressure to reduce their MSR exposure as a result of heightened capital reserve requirements under Basel III, regulatory scrutiny and a more challenging servicing environment. As a result, we believe the volume of MSR sales is likely to be substantial for some period of time.

We estimate that MSRs on approximately $200 - 300 billion of mortgages are currently for sale, which would require a capital investment of approximately $2
- 3 billion based on current pricing dynamics. We believe that non-bank servicers who are constrained by capital limitations, such as Nationstar, will continue to sell a portion of the Excess MSRs or other servicing assets, such as advances. We also estimate that approximately $1 - 2 trillion of MSRs could be sold over the next several years. In addition, approximately $1.2 trillion of new loans are expected to be created annually, according to the Mortgage Bankers Association. We believe this creates an opportunity to enter into "flow arrangements," whereby loan originators agree to sell Excess MSRs on newly originated loans on a recurring basis (often monthly or quarterly). We believe that MSRs are being sold at a discount to historical pricing levels, although increased competition for these assets has driven prices higher recently. There can be no assurance that we will make additional investments in Excess MSRs or that any future investment in Excess MSRs will generate returns similar to the returns on our original investments in Excess MSRs.

Beginning in April 2012, we began to invest in RMBS as a complement to our Excess MSR portfolio. As of the fourth quarter of 2013, approximately $7 trillion of the $10 trillion of residential mortgages outstanding had been securitized, according to Inside Mortgage Finance. Approximately $6 trillion were Agency RMBS according to Inside Mortgage Finance, which are securities issued or guaranteed by a U.S. Government agency, such as Ginnie Mae, or by a GSE, such as Fannie Mae or Freddie Mac. The balance has been securitized by either public trusts or PLS, and are referred to as Non-Agency RMBS.

Since the onset of the financial crisis in 2007, there has been significant volatility in the prices for Non-Agency RMBS, which resulted from a widespread contraction in capital available for this asset class, deteriorating housing fundamentals, and an increase in forced selling by institutional investors (often in response to rating agency downgrades). While the prices of these assets have started to recover from their lows, from time to time there may be opportunities to acquire Non-Agency RMBS at attractive risk-adjusted yields, with the potential for upside if the U.S. economy and housing market continue to strengthen. We believe the value of existing Non-Agency RMBS may also rise if the number of buyers returns to pre-2007 levels. Furthermore, we believe that in many Non-Agency RMBS vehicles there is a meaningful discrepancy between the value of the Non-Agency RMBS and the recovery value of the underlying collateral. We intend to pursue opportunities to structure transactions that would enable us to realize this difference. We actively monitor the market for Non-Agency RMBS and our portfolio to determine when to strategically purchase and sell Non-Agency RMBS from time to time. We currently expect that the size of our Non-Agency portfolio will fluctuate depending primarily on our Manager's assessment of expected yields and alternative investment opportunities. The primary causes of mark-to-market changes in our RMBS portfolio are changes in interest rates and credit spreads.

Interest rates have risen significantly in recent months and may continue to increase, although the timing of any further increases is uncertain. In periods of rising interest rates, the rates of prepayments and delinquencies with respect to mortgage loans generally decline. Generally, the value of our Excess MSRs is expected to increase when interest rates rise or delinquencies decline, and the value is expected to decrease when interest rates decline or delinquencies increase, due to the effect of changes in interest rates on prepayment speeds and delinquencies. However, prepayment speeds and delinquencies could increase even in the current interest rate environment, as a result of, among other things, a general economic recovery, government programs intended to foster refinancing activity or other reasons, which could reduce the value of our investments. Moreover, the value of our Excess MSRs is subject to a variety of factors, as described under "Risk Factors." In the first quarter of 2014, the fair value of our investments in Excess MSRs (directly and through equity method investees) increased by approximately $3.6 million and the weighted average discount rate of the portfolio remained relatively unchanged at 12.5%.

We do not expect changes in interest rates to have a meaningful impact on the net interest spread of our Agency ARM and Non-Agency portfolios. Our RMBS are primarily floating rate or hybrid (i.e., fixed to floating rate) securities, which we generally finance with floating rate debt. Therefore, while rising interest rates will generally result in a higher cost of financing, they will also result in a higher coupon payable on the securities. The net interest spread on our Agency ARM RMBS portfolio as of March 31, 2014 was 1.19%, compared to 0.94% as of December 31, 2013. The net interest spread on our Non-Agency RMBS portfolio as of March 31, 2014 was 2.67%, compared to 2.83% as of December 31, 2013.

In November 2013, we made our first investment in non-performing loans. We are seeing substantial volumes of distressed residential mortgage loan sales.

Credit performance also affects the value of our portfolio. Higher rates of delinquency and/or defaults can reduce the value of our Excess MSRs, Non-Agency RMBS, Agency RMBS and loan portfolios. For our Excess MSRs on Agency portfolios and our Agency RMBS, delinquency and default rates have an effect similar to prepayment rates. Our Excess MSRs on Non-Agency portfolios are not affected by delinquency rates because the servicer continues to advance principal and interest until a default occurs on the applicable loan; defaults have an effect similar to prepayments. For our Non-Agency RMBS and loans, higher default rates can lead to greater loss of principal.

Credit spreads continued to decrease, or "tighten," in the first quarter of 2014 relative to the fourth quarter of 2013, which has had a favorable impact on the value of our securities and loan portfolio. Credit spreads measure the yield relative to a specified benchmark that the market demands on securities and loans based on such assets' credit risk. For a discussion of the way in which interest rates, credit spreads and other market factors affect us, see "Quantitative and Qualitative Disclosures About Market Risk."

The value of our consumer loan portfolio is influenced by, among other factors, the U.S. macroeconomic environment, and unemployment rates in particular. We believe that losses are highly correlated to unemployment; therefore, we expect that an improvement in unemployment rates would support the value of our investment, while deterioration in unemployment rates would result in a decline in its value.

OUR Portfolio

Our portfolio is currently composed of servicing related assets, residential securities and loans and other investments, as described in more detail below. Our asset allocation and target assets may change over time, depending on our Manager's investment decisions in light of prevailing market conditions. The assets in our portfolio are described in more detail below.

                                                                 Percentage of                          Weighted
                                                Amortized            Total                               Average
                             Outstanding       Cost Basis          Amortized          Carrying        Life (years)
                             Face Amount           (A)            Cost Basis            Value              (B)
Investments in:
Excess MSRs (C)             $ 252,038,364      $   584,822                  9.1 %    $   680,011                6.1
Servicer Advances (C)           3,430,473        3,457,385                 53.9 %      3,457,385                3.2
Agency ARM RMBS                 1,085,447        1,162,098                 18.1 %      1,162,650                4.3
Non-Agency RMBS                 1,780,864        1,173,195                 18.3 %      1,182,571                8.4
Residential Mortgage
Loans                              57,818           34,045                  0.6 %         34,045                3.6
Consumer Loans (C)              3,098,138              N/A                  N/A          231,422                3.2
Total/ Weighted Average     $ 261,491,104      $ 6,411,545                100.0 %    $ 6,748,084                4.6

Reconciliation to GAAP
total assets:
Cash and restricted cash                                                                 175,102
Derivative assets                                                                         45,040
Other assets                                                                              30,608

GAAP total assets                                                                    $ 6,998,834

(A) Net of impairment.
(B) Weighted average life is based on the timing of expected principal reduction on the asset.
(C) The outstanding face amount of Excess MSRs, servicer advances, and consumer loans is based on 100% of the face amount of the underlying residential mortgage loans, currently outstanding advances, and consumer loans respectively.

Servicing Related Assets

Excess MSRs

As of March 31, 2014, we had approximately $680.0 million estimated carrying value of Excess MSRs (held directly and through joint ventures). As of March 31, 2014, our completed investments represent an effective 33% to 80% interest in the Excess MSRs (held either directly or through joint ventures) on pools of mortgage loans with an aggregate UPB of approximately $252.0 billion. Nationstar is the servicer of the loans underlying all of our investments in Excess MSRs to date, and it earns a basic fee in exchange for providing all servicing functions. In addition, Nationstar retains a 20% to 35% interest in the Excess MSRs and all ancillary income associated with the portfolios. In our capacity as owner of the Excess MSR, we do not have any servicing duties, liabilities or obligations associated with the servicing of the portfolios underlying any of our Excess MSRs. However, we, through co-investments made by our subsidiaries, may separately agree to do so and have separately purchased the servicer advances, including the right to receive the basic fee component of related MSRs, on the Non-Agency portfolios (Pools 5, 10, 12, 17 and 18) underlying our Excess MSR investments. See "-Servicer Advances" below.

Each of our Excess MSR investments to date is subject to a recapture agreement with Nationstar. Under the recapture agreements, we are generally entitled to a pro rata interest in the Excess MSRs on any initial or subsequent refinancing by Nationstar of a loan in the original portfolio. In other words, we are generally entitled to a pro rata interest in the Excess MSRs on both (i) a loan resulting from a refinancing by Nationstar of a loan in the original portfolio, and (ii) a loan resulting from a refinancing by Nationstar of a previously recaptured loan.

The tables below summarize the terms of our investments in Excess MSRs completed as of March 31, 2014.

                                                                     Summary of Direct Excess MSR Investments as of March 31, 2014

                                                                                                                 MSR Component(A)                                                 Excess MSR
                                                                                                                                                       Interest in
                                                  Initial UPB      Current UPB                                                                         Excess MSR         Purchase          Carrying
                               Investment Date       (bn)            (bn)(B)         Loan Type(C)     MSR (bps)              Excess MSR (bps)              (%)           Price (mm)        Value (mm)
Pool 1                                  Dec-11    $       9.9      $        6.6      GSE                       32  bps                      26  bps             65 %    $       43.7      $       41.5
Pool 2                                  Jun-12           10.4               7.7      GSE                       30                           22                  65 %            42.3              40.3
Pool 3                                  Jun-12            9.8               7.6      GSE                       30                           22                  65 %            36.2              37.9
Pool 4                                  Jun-12            6.3               4.9      GSE                       26                           17                  65 %            15.4              17.5
Pool 5(D)                               Jun-12           47.6              35.8      PLS                       33                           14                  80 %           151.5             147.7
Pool 11 (direct portion)(E)             May-13              -               0.5      GSE                       25                           19                  67 %             2.4               2.6
Pool 12(D)                              Sep-13            5.4               5.0      PLS                       50                           26                  40 %            17.4              17.5
Pool 17(D)                              Jan-14            8.1               8.1      PLS                       34                           19                  33 %            19.1              19.1
Pool 18(D)                              Nov-13            9.2               8.5      PLS                       37                           16                  40 %            17.0              17.6
 Total/Weighted Average                           $     106.7      $       84.7                                33  bps                      18  bps                     $      345.0      $      341.7

(A) The MSR is a weighted average as of March 31, 2014, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
(B) As of March 31, 2014.
(C) "GSE" refers to loans in Fannie Mae or Freddie Mac securitizations. "PLS" refers to loans in private label securitizations. (D) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2014 (Note 6 to our consolidated financial statements included herein). (E) A portion of our investment in Pool 11 was made as a direct investment, and the remainder was made as an investment through a joint venture accounted for as an equity method investee, as described in the chart below. The direct investment in Pool 11 includes loans that, upon refinancing by a third-party, became serviced by Nationstar and subject to a 67% Excess MSR owned by us.

Summary Excess MSR Investments Through Equity Method Investees as of March 31, 2014

                                                                                              MSR Component(A)
                                                                                                                                  NRZ
                                                                                                                                Interest          Investee
                 Commitment/                                                                                                       in            Interest in        NRZ Effective        Investee
                 Investment      Initial UPB      Current UPB                                                Excess MSR         Investee       Excess MSR (%)         Ownership          Carrying
                    Date            (bn)            (bn)(B)         Loan Type(C)     MSR (bps)                 (bps)              (%)                (D)               (%)(D)           Value (mm)
Pool 6                Jan-13     $      13.0      $        9.6      GM                       40    bps                25   bps         50 %                 67 %             33.5 %    $        55.4
Pool 7                Jan-13            38.0              30.6      GSE                      26                       15               50 %                 67 %             33.5 %            123.8
Pool 8                Jan-13            17.6              13.5      GSE                      28                       19               50 %                 67 %             33.5 %             67.5
Pool 9                Jan-13            33.8              29.7      GM                       39                       22               50 %                 67 %             33.5 %            157.6
Pool 10(E)            Jan-13            75.6              66.7      PLS                      34                       11               50 %              67-77 %        33.5-38.5 %            201.8
Pool 11
(indirect
portion)(F)           May-13            22.8              17.3      GSE                      25                       15               50 %                 67 %             33.5 %             67.6
Total/Weighted
Average                          $     200.8      $      167.4                               32    bps                16   bps                                                         $       673.7

(A) The MSR is a weighted average as of March 31, 2014, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
(B) As of March 31, 2014.
(C) "GM" refers to loans in Ginnie Mae securitizations. "GSE" refers to loans in Fannie Mae or Freddie Mac securitizations. "PLS" refers to loans in private label securitizations. (D) The equity method investee purchased an additional interest in a portion of Pool 10. Investee interest in Excess MSR and NRZ effective ownership in Pool 10 represent the range of ownership interests in the pool. (E) Pool in which we also invested in related servicer advances, including the basic fee component of the related MSR as of March 31, 2013 (Note 6 to our consolidated financial statements included herein). (F) A portion of our investment in Pool 11 was made as a direct investment and the remainder was made as an investment through a joint venture accounted for as an equity method investee, as described in the chart above.

The tables below summarize the terms of our investments in Excess MSRs that were not yet completed as of May 12, 2014:

                                              Summary of Pending Excess MSR Investments (Committed but Not Closed)

                                                                                    MSR Component(A)

                                                                                                                                                         NRZ
                                                                                                                                                       Excess
                                                                                                                         NRZ          Direct             MSR
                                                                                                                     Interest in    Interest in        Initial
                     Commitment    Initial          Current       Loan                              Excess            Investee        Excess         Investment
                        Date       UPB (bn)       UPB (bn)(B)    Type(C)    MSR (bps)              MSR (bps)             (%)          MSR (%)          (mm)(D)
Pool 13 (Direct
Investment)              Nov-13   $      6.1     $         6.1   GSE                 25  bps               19  bps       N/A                  33 %   $      14.5
Pool 15 (Direct
Investment)              Nov-13          2.2               2.2   GSE                 37                    27            N/A                  33 %           6.3
Pool 20 (Direct
Investment)              Apr-14          0.7               0.7   GSE                 42                    32            N/A                  33 %           2.3
Total/Weighted
Average                           $      9.0     $         9.0                       29  bps               22  bps                                   $      23.1

(A) The MSR is a weighted average as of the commitment date, and the Excess MSR represents the difference between the weighted average MSR and the basic fee (which fee remains constant).
(B) As of commitment date.
(C) "PLS" refers to loans in private label securitizations. "GSE" refers to loans in Fannie Mae or Freddie Mac securitizations. (D) The actual amount invested will be based on the UPB at the time of close.

Summary of Excess MSR Investments closed subsequent to March 31, 2014

                                                                             MSR Component(A)
                                                                                                                                           NRZ
                                                                                                                                         Excess
                                                                                                            NRZ           Direct           MSR
                                               Current                                                  Interest in    Interest in       Initial
                   Commitment    Initial         UPB        Loan                           Excess        Investee         Excess       Investment
                      Date       UPB (bn)      (bn)(B)     Type(C)      MSR (bps)        MSR (bps)          (%)          MSR (%)         (mm)(D)
Pool 14 (Direct
Investment)            Nov-13   $      1.0   $     1.0     GSE               25               19                N/A           33 %     $       2.4
Pool 16 (Direct
Investment)            Nov-13          1.5         1.5     GSE               27               17                N/A           33 %             2.9
Pool 19 (Direct
Investment)            Apr-14         10.4        10.4     GSE               25               19                N/A           33 %            28.7
                                $     12.9   $    12.9                       25  bps          19  bps                                  $      34.0

The following table summarizes the collateral characteristics of the loans underlying our direct Excess MSR investments as of March 31, 2013 (dollars in thousands):

                                                                                                                       Collateral Characteristics
                   Current          Original            Current                         WA FICO Score                                                          Adjustable Rate
                  Carrying          Principal          Principal        Number of                                          WA Maturity       Average Loan        Mortgage %         1 Month CPR       1 Month CRR       1 Month CDR         1 Month
                   Amount            Balance            Balance           Loans              (A)            WA Coupon        (months)        Age (months)            (B)                (C)               (D)               (E)          Recapture Rate
Pool 1
Original Pool    $    26,918     $     9,940,385     $    4,964,917         37,172                 672             5.5 %            274                 89                21.0 %            25.4 %            22.4 %             3.9 %             42.4 %
Recaptured
Loans                  8,524                   -          1,661,472          8,947                 727             4.4 %            319                 10                   -               1.8 %             1.5 %             0.2 %              7.7 %
Recapture
Agreements             6,019                   -                  -              -                   -               -                -                  -                   -                 -                 -                 -                  -
                      41,461           9,940,385          6,626,389         46,119                 686             5.2 %            285                 69                15.7 %            19.5 %            17.2 %             3.0 %             33.7 %

. . .
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